The $6 million shortfall is for fiscal 2012, which ended Aug. 31. So it doesn't take into account the musician lockout that began Oct. 1.
As expected, the Minnesota Orchestra has posted an operating deficit of $6 million for fiscal 2012. It is the largest deficit in the orchestra's 110-year history and twice as large as last year's shortfall.
The news was presented at a closed meeting of the board of directors Thursday. In an unusual step, the board did not hold a celebratory annual meeting, which a spokesperson said was an acknowledgment that the orchestra is mired in a labor dispute with union musicians. All concerts for the fall and holiday seasons have been canceled.
Amid the bad news came the unrelated bright spot that the orchestra, with music director Osmo Vänskä, was nominated for a Grammy Award Wednesday night. The orchestra's first CD of its cycle of all the Sibelius symphonies was nominated for best orchestral performance.
The financial results released Thursday cover the year ended Aug. 31 -- a full month before musicians were locked out for rejecting a board proposal that would cut their salaries by roughly one-third.
Earned revenue of $8.5 million, which includes ticket sales and other income, dropped $600,000 from 2011 and is 22 percent lower than its recent peak in 2009. Contributed revenue of $12.6 million was about flat from last year. The third leg of revenue is a draw from the orchestra's endowment. That figure was $4.47 million, for total revenue of $25.5 million.
Expenses rose slightly
Fiscal 2012 expenses of $31.5 million were up from the previous year but have declined since their 2009 peak. In fact, 2012 expenses are up less than $1 million since 2007, despite an added $3.8 million in musician pay in that period. Board chairman Jon Campbell said cuts to administrative and concert expense have kept budgeted expenses essentially flat.
The amount drawn from the orchestra's permanent endowment represents 5.6 percent of a rolling average. In the past two years, the board approved endowment draws of 11.4 percent and 13.6 percent, considerably higher than is the rule of thumb for nonprofits.
However, the board will need to borrow from its endowment to cover the 2012 deficit. That brings the total withdrawal from the endowment to $10.4 million. This does not include the $3 million in distributions from restricted trusts, which are included under contributed income.
"When you boil it down, we had so much cash [operating revenue] come in this year, and so much cash that we had to pay out," said Campbell.
To cover the difference between revenue and expense, Campbell said, "We need to take it from the endowment."
Musicians, who have been locked out since Oct. 1, issued a statement that said they "cannot and will not trust any audit directed by the same management and board leadership that stated that they would consult a PR firm on 'which deficit to report,'" a reference to revelations of the board's deliberations in 2011 as to how to report a $2.9 million deficit. In 2009 and 2010, the board used "additional" endowment draws to report balanced budgets.
The current value of all the orchestra's investments was stated to be $137 million. That is $90 million less than projections that were made in 2007 -- before a major downturn in financial markets.
Brian Shapiro, an accounting professor with the University of St. Thomas Opus College of Business, said those projections struck him as reasonable. Also, they point to the need for greater fundraising.
"This board really needs another $100 million in the endowment to fully fund musician compensation," he said. "Increasing operating revenue is good, but the endowment is really the issue."
Within the total investment number is the Minnesota Orchestral Association permanent endowment. The value of that account at the end of fiscal 2012 was $59 million, $18 million below the original value of contributions. This "underwater" balance demonstrates the stress on the endowment. The board has said the diminished endowment is the reason it has asked for steep salary cuts.
In the letter to the board, the musicians said the current contract proposal would make the Minnesota Orchestra a "Feeder orchestra for the 15-16 orchestras above us. ... The ensemble will be further hampered by the devastated morale in those left behind."
There are no negotiations scheduled between the board and musicians. The bargaining is being handled under the auspices of the federal mediation office.
Star Tribune publisher and CEO Michael Klingensmith is a member of the Orchestra board.
Graydon Royce • 612-673-7299